Decoupled Debit Presents Threats and Opportunities to Banks

This past summer, Capital One (McLean, Va.) announced that it would begin issuing debit cards. Alarm bells went off in the banking community over the idea that a nonbank had actually found a way to encroach upon banks' debit card stronghold -- by using NACHA's automated clearing house (ACH) network.

"Decoupled debit" is the phrase coined to define this new payment mechanism in which the traditional demand deposit account (DDA) is untied from the issuer of a debit card. According to Dan Schutzer, executive director of the Financial Services Technology Consortium (FSTC) in New York, a consumer presents the debit card at the point of purchase, and the request for payment is sent to the debit card issuer, which creates an ACH to debit the account at the cardholder's bank. Payment is directed to the merchant.

While decoupled debit offers monoline issuers another avenue by which to gain customers, notes Schutzer, it could be a huge threat to banks' deposit business. "Decoupled debit allows a bank or nonbank to issue a debit card against a DDA the issuer of the card doesn't have," he explains.

However, there are existing models that allow banks to get in on the decoupled debit card action. One company that helps enable this model is San Mateo, Calif.-based Tempo (formerly Debitman). According to CEO Michael Grossman, Tempo initially set out to provide a merchant-friendly alternative to traditional card networks by charging lower interchange fees.

"We unbundled our network and our platform so that the debit cards can work with the network of the issuer's choice, rather than being relegated to one card network," Grossman explains. "This ... can help banks compete [in the decoupled debit space]."

London-based HSBC ($2.15 trillion in assets) already is seizing the opportunity. "The challenge for our retailer clients was developing an affinity-branded card program to serve the debit preferences of their customers," says Daniel Eckert, head, product venture, acquisition and development, HSBC. "[Decoupled debit] was an opportunity for us to serve our retailers and their customers who prefer debit." To deliver the debit product to market rapidly, HSBC partnered with Tempo in late 2005, Eckert notes.

Assuming Some Risk

But decoupled debit doesn't come without risks. Perhaps the greatest risk is the fact that it uses the ACH network. "With a traditional debit card, you know whether the money is in the account before the transaction is authorized," explains Tempo's Grossman. "You don't have this certainty with decoupled debit because you're initiating the payment via ACH, and there's a time lag involved." Grossman claims Tempo helps mitigate this risk with models built around issuance, ongoing transactions and exception handling.

However, the risks are even greater for banks that are not involved in the decoupled debit game, notes the FSTC's Schutzer. The DDA bank is going to lose a source of revenue, he stresses. "Now you have an ACH-based debit card and that fee income is taken away from the DDA bank," Schutzer comments. "The DDA doesn't die, but it loses its profitability."